Divestiture Impact
Q: How will the divestiture affect earnings and margins?
A: The upcoming divestiture, expected in Q2, will reduce earnings by $0.15 this fiscal year, with slight impact in Q2 ($0.01), then $0.05 in Q3, and $0.08 in Q4. It involves about $300 million in sales, all from North American businesses, and will have a favorable margin impact of 20 basis points for the company and 40 basis points for North American operations. The business has mid-teens EBITDA margins. This move aligns with our "best owner" strategy, as we didn’t see it as a core technology for Parker.

Margin Outlook
Q: What's driving the strong incremental margins?
A: Our Q1 performance had 95% incrementals, mainly due to strong Aerospace growth and effective cost controls in industrial businesses. Future quarters are expected to be well above our stated 30% incremental margin target. The divestiture also contributes to margin improvement, adding 40 basis points to North American margins.

Order Trends
Q: What are the trends in orders, and any signs of improvement?
A: North American orders have been negative for seven quarters, with Q1 at negative 3%. Historically, we've seen 5 to 7 quarters of negative orders before a turn, so we believe a recovery is near. International orders turned positive due to improvements in Asia, particularly in semiconductor and transportation markets.

Market Weakness
Q: Can you elaborate on headwinds in North America?
A: In-plant and industrial markets are experiencing near-term delays in projects and CapEx spending, affecting tool builders. Off-highway is now expected to be high single-digit negative for the year, primarily due to OEM destocking and pressures in agriculture from lower crop prices and higher interest rates. Construction remains soft, especially in Asia Pacific and EMEA.

Distribution Channel Health
Q: How is the distribution channel performing amid destocking?
A: Destocking at the OEM level continues, but channel sentiment remains very positive. Distributors report high quote activity but are experiencing project delays and are managing inventory tightly, not yet engaging in restocking. Improved lead times allow them to operate with less product.

Aerospace Segment Performance
Q: What's the outlook for the Aerospace segment?
A: Defense MRO grew 47% in Q1, driven by success with public-private partnerships and leveraging the Meggitt portfolio. We raised guidance for defense MRO to low double digits growth. Commercial MRO saw 32% growth in Q1, with continued air traffic growth and increased spare parts purchases expected. Commercial OEM growth was 3%, and guidance is now low single digits due to slower production rates.

M&A Pipeline
Q: What's the status of the M&A pipeline and capital deployment?
A: The acquisition pipeline is active with targets of all sizes. We're committed to deploying capital but not obligated to make deals solely because leverage is less than 2x. We're seeking companies where we're the best owner, with interconnected technologies, and deals accretive to growth, margins, cash flow, and EPS. Timing remains a significant factor in M&A activities.

Mega Projects
Q: What is the outlook on mega projects and their timing?
A: There are $1 trillion in announced projects, with some delays and pushouts but additional ones being added. Projects have shifted out a bit, but some are expected to start in calendar year 2025. We recently secured a significant win in Asia Pacific on an EV battery line.

Operational Agility
Q: How is Parker handling labor flexibility amid industry challenges?
A: We have the ability to flex our workforce across the company, including shifting production between OEM and aftermarket in Aerospace. Our decentralized structure allows businesses to act swiftly, and despite challenges like strikes, we're not facing near-term issues.

Backlog Levels
Q: What are current backlog levels, and are they sustainable?
A: The industrial backlog remains steady at $4.2 billion, in the mid- to high 20% range as a percentage of sales. This level is partly structural due to changing customer ordering patterns and reflects our transformed portfolio with longer-cycle, higher aftermarket businesses.

Risk of Cancellations
Q: Do delays risk becoming cancellations?
A: We constantly analyze backlog and have not seen cancellations—only delays. It feels more like a pause, and we monitor indicators like additional plant shutdowns and changes in production schedules to stay ahead.

Election Impact
Q: Are customers delaying projects due to election uncertainty?
A: Our customers and distributors are not indicating delays due to the upcoming election. They're focused on meeting demand, though some project delays may be influenced by higher interest rates.